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Reduction in immigration would impact the State Pension – but could be offset by changes to government policy

The Institute and Faculty of Actuaries (IFoA) has today (2 June) released a report looking at the impact on the State pension of reduced immigration to the UK in both the medium and the long term, key findings include:

  • Reducing annual migration numbers, for example by c150,000*, could cost the State more than £3bn per year by 2032 and more than £8bn per year by 2057
  • To offset this funding gap in 2057 might require a further increase in the State Pension Age from 68 to 69 or a reduction in State Pension of £300 per year
  • Government could also use policy levers such as National Insurance contributions, or the level of State Pension benefits to mitigate against the net increase in Government costs
  • Raising the potential earnings profile of immigrants could also mitigate, or even reverse, impacts

In this webcast, Dr. Angus Armstrong, head of Macroeconomics at the National Institute for Economic and Social Research (NIESR), lists the main conclusions of the recently commissioned IFoA research 'The Impact of Possible Migration Scenarios After 'Brexit' on the State Pension System.'  Dr. Armstrong also explains in detail which policy options the UK government has in order to offset these changes:

The report, undertaken by the National Institute for Economic and Social Research (NIESR), on behalf of the IFoA, found that if EU migration into the UK falls by around 150,000*, the net impact on tax revenues and benefit expenditure could cost the State more than £3bn per annum by 2032, and more than £8bn per annum by 2057.

However, the research found that these impacts could be mitigated, or even reversed, through changes in the potential earnings profile of immigrants and their skills mix. One example of this would be if the Government could introduce a skills based migration policy (such as the points-based system in Australia). 

The report considers a number of other policy levers that the Government could use to offset such long term impacts. Some of the changes that could be used to offset the £8bn cost in 2057 include:

  • Raise the State Pension Age by one year, or;
  • Lower the amount of state pension for new pensioners by 3.5%, which equates to approximately £300 less per person per year, or
  • Increase the rate of National Insurance Contributions by nearly 1.5%

Derek Cribb, Chief Executive of the IFoA, comments,

“A reduction in EU migrants, an increase in total non-EU migrants and an upscaling of immigrant skills are all possible policies which have been aired in the referendum debate. To date, focus has been on either the additional expenditure due to immigration or the additional income it brings in.  Our report brings them together to show the overall budgetary impact of these scenarios on the State pension.

“The EU referendum involves complex issues that the public need to be aware of. As well as considering short term effects, it is also important to consider likely longer term impacts.  We are conscious that immigration is a major aspect of the EU referendum debate, and the Institute and Faculty of Actuaries (IFoA) has commissioned this research to address this important topic. Our research shows that if the Government were to reduce immigration by around 150,000, there could be implications for the State pension system.  However, these could be mitigated or reversed if the Government introduced a skills- based immigration policy.

“The research also shows that Government spending on State benefits is expected to increase by £94bn between now and 2057 even without any changes to immigration. A further £8bn increase, as shown in our research, might be considered small in comparison.”

Dr. Angus Armstrong, Director of Macroeconomics at NIESR and a co-author of the report, comments:

“There is of course uncertainty associated with long term projections. Our analysis takes into account how people are likely to respond to each of the policy options (for example, the three listed above) in terms of how much they save and work. This gives us a more complete picture of the overall likely economic impact of possible changes in immigration policy. The findings of our modelling are intuitively plausible. However, whether a UK government could successfully introduce an ‘Australian like’ migration policy remains to be seen.

“One aspect of migration policy that has not been considered to date is the extent to which migrants contribute to, and draw on, the state pension system. This was the objective of this research programme. We use NIESR’s Lifetime Income Distributional Analysis model (LINDA) to simulate the impact on immigration scenarios on future pension outcomes.**”

Download and read the full report: The Impact of Possible Migration Scenarios After 'Brexit' on the State Pension System

~ENDS~

*The researchers analysed a 67% reduction to current immigration levels as this is the Government’s target level of 100,000 per year.

** LINDA was originally developed by NIESR for HM Treasury, HM Revenue and Customs, and the Department for Work and Pensions.

Contacts:

Luca Pieri, NIESR Communications and Events Coordinator
Tel: 020 7654 1931
Email: l.pieri@niesr.ac.uk

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